Verizon Communications Inc. -- Moody's changes Verizon's outlook to stable; Baa1 rating affirmed

Rating Action: Moody's changes Verizon's outlook to stable; Baa1 rating affirmedGlobal Credit Research - 10 Mar 2021New York, March 10, 2021 -- Moody's Investors Service (Moody's) changed Verizon Communications Inc.'s (Verizon) rating outlook to stable from positive and affirmed the company's Baa1 issuer and senior unsecured ratings, and its Prime-2 rating for commercial paper. Moody's also affirmed the Baa2 unsecured rating of Verizon subsidiary GTE LLC and changed its outlook to stable.The outlook change to stable from positive reflects Moody's view that debt-funded spectrum investments significantly lengthen Verizon's deleveraging beyond the period consistent with Moody's previous positive rating outlook. The company is publicly committed to debt reduction with its goal of achieving a company-defined net unsecured leverage range target first before returning excess cash flow after dividends to shareholders. Verizon's disciplined focus on a financial policy prioritizing network and other business investments and long term balance sheet strengthening over share repurchases is an important driver of its credit profile.Affirmations:..Issuer: Verizon Communications Inc..... Issuer Rating, Affirmed Baa1....Senior Unsecured Shelf, Affirmed (P)Baa1....Senior Unsecured Commercial Paper, Affirmed P-2....Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa1....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1..Issuer: GTE LLC....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2Outlook Actions:..Issuer: Verizon Communications Inc.....Outlook, Changed To Stable From Positive..Issuer: GTE LLC....Outlook, Changed To Stable From PositiveRATINGS RATIONALEVerizon's Baa1 long-term debt rating reflects its significant scale, extensive assets, predictable cash flow and a strong market position, including a dominant position in the US wireless market. Verizon has consistently demonstrated the ability, willingness and discipline to maintain capital investment intensity sufficient to improve network infrastructure to defend and sustain its market position against disruptive technology, shifting consumer demand and historically intense competition. The Baa1 rating also reflects Moody's expectation that Verizon's sizable mid-band spectrum investments will constrain its balance sheet until expanding revenue and EBITDA growth and sustained free cash flow generation enable more rapid debt reduction beginning in 2023 and beyond. Given the elevated financial leverage, the Baa1 rating has very little cushion for execution missteps and/or additional leveraging events. The company's deleveraging trajectory will depend on its ability to boost revenue from its existing customer base through upgrades, expand its share of industry subscribers and successfully deploy 5G technologies to develop new end markets, including in fixed wireless and mobile edge computing.The licenses Verizon recently won in the FCC's C-band auction only become available for deployment in two stages, with the first allocation set for December 2021 and the second for December 2023, which delays the company's ability to more quickly monetize this debt-funded spectrum. However, Verizon did secure 60% of the 100 MHz of spectrum which will be cleared by December 2021 and which will enable the company to more quickly deploy 5G in the largest US markets. In addition, within the spectrum to-be-cleared by December 2021, Verizon won the entire A1 block and will control a contiguous spectrum band across the US, one which also benefits from being the farthest from the higher mid-band frequencies satellite providers will continue to use. Moody's views spectrum as the most important core asset in a wireless network operator's portfolio, and given its irregular availability considers spectrum investments as akin to a company's strategic M&A activity. Verizon's $6.25 billion planned purchase of Tracfone from America Movil, S.A.B. de C.V. (A3 negative) is viewed by Moody's as having lower execution risk with significant network and cash flow synergies realizable within a relatively short 12 month window following an expected mid-2021 transaction close after receipt of regulatory approvals. As Verizon operates in a fast-evolving and competitive telecom environment, Moody's views the company's network investments as supportive of maintaining a strong competitive position. Moody's believes Verizon will be able to reduce debt leverage (Moody's adjusted) steadily over time and commensurate with availability and follow-on commercial development of its new spectrum capacity position in the evolving 5G telecom era.Verizon remains publicly committed to a company-calculated net unsecured debt to EBITDA target range (non-GAAP) of 1.75x to 2.0x, defined as net unsecured debt to adjusted EBITDA (earnings before interest, taxes, depreciation and amortization). With a sizable year-end 2020 cash balance of $22.2 billion, which includes $12 billion of debt raised in November 2020 primarily earmarked for spectrum investments, this company-calculated metric was 2.0x at December 30, 2020 and flat compared with 2019. Verizon anticipates its company-defined net leverage target peaking at 2.8x by year-end 2021, and Moody's expects the company's ability to return to the lower 2.0x level of this company-defined target will likely take four years or more and will be predicated on delivering consistent revenue growth rates above historical levels. On a Moody's adjusted basis, Moody's projects peak debt/EBITDA of 3.5x at year-end 2021, falling towards 3.0x by year-end 2023. This high debt leverage (Moody's adjusted) is a result of Verizon's debt funding of an approximate $45 billion obligation for 161 MHz of C-band licenses following the February 24, 2021 completion of the FCC's C-band auction of a total 280 MHz of mid-band spectrum in the 3.7 GHz to 3.98 GHz frequency range. Moody's will also treat approximately $7.5 billion of associated clearing and incentive payments to satellite operators, which are tied to Verizon's C-band spectrum investment obligations, as funded debt for an aggregate debt-funded spectrum investment of about $53 billion. The clearing and incentive payments are to be paid in unequal installments through 2024 and may have minor timing uncertainty.Verizon's consolidated revenue contracted 2.7% in 2020 compared with 2019 due to COVID-19 factors, which included lower handset sales due to some initial store closings in the early months of the pandemic and reduced store hours later, continuing social distancing standards for store access during the year, lower roaming from reduced travel, the elimination of late fees for a period of time and lower overage charges due to the company's Keep Americans Connected pledge. Verizon's company-reported adjusted EBITDA contracted by 0.3% in 2020 compared with 2019 as a consequence of COVID-related factors as well, which began more firmly abating by the third quarter of 2020. Moody's deleveraging expectations for Verizon pre-COVID were driven by EBITDA (Moody's adjusted) expansion from steady wireless service revenue growth, flattening of legacy wireline contraction, new product and end market growth and efficiency benefits from continued solid execution on cost transformation initiatives, all of which Moody's expects will be drivers of mid single-digit or higher EBITDA growth in 2021.Absent the extraordinary impacts of COVID-19 in 2020, Verizon has historically produced continued EBITDA growth with steady improvements in operational performance and efficiencies achieved from its business excellence initiatives. Verizon is executing on schedule in its efforts to remove $10 billion of annual costs from its business through year-end 2021, a cost cutting goal roughly equal in size to its current annual dividend. Moody's expects that Verizon's capital intensity will increase incrementally in 2021 and hold steady through 2023 before declining, driven by $10 billion of targeted network-related spending associated with new C-band spectrum deployments. Annual dividend increases are expected to remain modest, enabling free cash flow to increase with improved revenue growth and from expansions into new end markets. Verizon is expected to continue to transform its network in a capital efficient manner to achieve optimal operational outcomes while also addressing future market and strategic needs.The stable outlook reflects Moody's expectations that Verizon will maintain its strong market position, reinvest into the business, and deliver steadily rising revenue, EBITDA and free cash flow growth from development of its network assets such that we expect leverage (Moody's adjusted) to improve toward 3x by late 2023, with more rapid deleveraging thereafter.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded if debt/EBITDA (Moody's adjusted) declines to 2.5x and free cash flow as a percentage of debt rises above 5%, both on a sustained basis.The ratings could be downgraded if Verizon's capacity to monetize its new spectrum assets and execute its growth strategy were challenged such that debt/EBITDA (Moody's adjusted) was expected to be sustained above 3x, including as a result of additional debt-funded investments, or if free cash flow was to turn negative for an extended period of time.The principal methodology used in these ratings was Telecommunications Service Providers published in January 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1055812. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Verizon Communications Inc., the second largest telecommunications provider in the US, has its headquarters in New York City. The company manages its operations primarily through two strategic business units: Verizon Consumer Group and Verizon Business Group. The Consumer segment provides consumer-focused wireless and wireline communications services and products to retail customers and resellers. The Business segment provides wireless and wireline communications services and products and other services to businesses, government customers and wireless and wireline carriers across the US and internationally. Verizon's combined Consumer and Business wireless services are provided across one of the most extensive wireless networks in the US. 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Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Neil Mack, CFA Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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